Shares of Specific Tata Group Firms Take Greater Beating on Day Two. Why?

Cyrus Mistry's letter, which raises questions of potential write-downs and alleged strategic missteps, has spooked the market and erased any influence Ratan Tata's return may have had.

New Delhi: While the general trend of Tata Group company shares taking a beating on the stock exchanges has continued for two days after chairman Cyrus Mistry was unceremoniously sacked, the stock prices of three firms within the Tata fold plunged by nearly 8% in early morning trading on Thursday.

Indian Hotels slumped by nearly 8% (hitting a low of Rs. 111.20) while Tata Teleservices dropped by 7%. Other group firms such as  Tata Power, Tata Communications and Tata Motors are currently down by anywhere between 2-4%.

While Indian Hotels has been having a particularly bad time, rival ITC’s shares having been performing well over the last two days, being the top gainer on the Nifty index.

Cyrus Mistry’s harsh letter to the board of Tata Sons, which found its way into the public domain yesterday, appears to have done crucial damage, with many analysts pointing out that Ratan Tata coming back as interim chairman has done little to calm small and international investors.

On Wednesday afternoon, the Bombay and National Stock Exchanges also asked for clarifications from six-listed Tata companies, whose share prices have taken a beating over the last two days. These six Tata Group firms also figured prominently on Mistry’s list of “legacy hotspots” that could collectively face a write-down of about $18 billion.

What did Mistry have to say about Indian Hotels, Tata Teleservices and Tata Power? Excerpts from his letter:

Indian Hotels – A gloomy picture

“Many foreign properties of IHCL and holdings in Orient Hotels have been sold at a loss. The onerous terms of the lease for Pierre in New York are such that it would make it a challenge to exit. Tata Chemicals still needs tough decisions about its UK and Kenya operations.

IHCL, beyond flawed international strategy, had acquired the Searock property at a highly inflated price and housed in an off balance sheet structure. In the process of unravelling this legacy, IHCL has had to write down nearly its entire networth over the past three years. This impairs its ability to pay dividends.”

Tata Teleservices – Bloodletting 

“Of all the companies in the portfolio, the telecom business has been continuously haemorrhaging. If we were to exit this business via fire sale or shut down, the cost would be $4-5 billion. This is in addition to any payout to DoCoMo of at least a billion plus dollars. The original structure of the DoCoMo transaction raises several questions about its appropriateness from a commercial or prudential perspective within the then prevailing Indian legal framework. In light of all of this, our strategy over the past three years has been to increase  the EBITDA from Rs. 400 crores to Rs. 2,500 crores, in the hope of being a potential player in consolidation of the industry”

Tata Power – Return on capital worries

Tata Power aggressively bid for the Mundra project based on low-priced Indonesian coal. As regulations changed, the losses in 2013-14 alone amounted to Rs. 1,500 crores. Given that Mundra constitutes Rs. 18,000 crores of capital employed (40% of’ the overall company’s capital employed), this substantially depresses the return on capital for Tata Power as well as carries the risk of considerable future impairment.”

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